An Offer in Compromise (OIC), authorized by IRC §7122, is a formal agreement in which the IRS accepts less than the full balance to close out a tax debt. It exists because collecting a partial amount now is often better for the government than chasing a full amount it will never get.

The most common basis is "doubt as to collectibility" — you don’t dispute that you owe the tax, but you can’t pay it in full. The entire case turns on one figure the IRS calls your Reasonable Collection Potential (RCP): the value of your assets plus what’s left of your income after allowable living expenses, projected over the remaining collection window. If your offer meets or exceeds your RCP, the IRS will generally accept it.

Governing statute
IRC §7122
Forms
Form 656; Form 433-A(OIC) / 433-B(OIC)
Application fee
$205 (waived if low-income)
Initial payment
20% (lump sum) or first installment
Compliance term if accepted
5 years
Basis (most common)
Doubt as to collectibility

How the IRS calculates Reasonable Collection Potential

RCP has two components. First, the net realizable equity in your assets — home, vehicles, bank accounts, retirement accounts, and business assets — valued at quick-sale rates. Second, your future income: monthly income minus the IRS’s allowable living expense standards (housing, food, transportation, health care), multiplied by 12 for a lump-sum offer or 24 for a periodic-payment offer.

Because the calculation uses the IRS’s own national and local expense standards rather than your actual spending, two people with identical incomes can have very different RCPs. This is exactly where getting the financial statement (Form 433-A(OIC) for individuals, 433-B(OIC) for businesses) right matters most.

— Before you file —
An offer calculated wrong wastes months and locks the collection clock open. The financial statement — not the cover letter — decides the outcome. Have your Reasonable Collection Potential run before you submit Form 656.

What it costs to apply

An OIC application requires a $205 application fee and an initial payment — 20% of the offer for a lump-sum offer, or the first monthly installment for a periodic offer. Low-income applicants who meet the IRS threshold can have both the fee and the initial payment waived. These amounts are generally non-refundable but are applied to your balance if the offer is rejected.

Who actually qualifies

You must be current on all filings and estimated payments, not in an open bankruptcy, and able to show that full payment would be a genuine stretch or impossibility. Historically the IRS accepts roughly a third to 40% of the offers it receives — the accepted ones are overwhelmingly those where the offer was calculated to match RCP before filing, not lowballed and negotiated.

The trade-offs to weigh

An accepted offer requires you to stay compliant — file and pay on time — for five years, or the settled debt is reinstated. Filing an offer also pauses the collection statute clock while it’s pending, and the IRS keeps any tax refund for the year the offer is accepted. For some taxpayers a payment plan or currently-not-collectible status is a better fit than an offer; a proper analysis compares all three before you commit fees and paperwork to any one of them.